The following is a discussion and analysis of the Company's results of operations for the three and nine months ended September 30, 2008 compared with the three and nine months ended September 30, 2007, and also a discussion of the Company's financial condition as of September 30, 2008. This discussion and analysis should be read in conjunction with the attached unaudited interim Consolidated Financial Statements and notes thereto and Argo Group's Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 5, 2008, including the audited Consolidated Financial Statements and notes thereto.

As described above in Item 1, Consolidated Financial Statements, Argonaut Group was the accounting acquirer in the merger of PXRE and Argonaut Group on August 7, 2007. As with the Consolidated Financial Statements and footnotes thereto included in Part 1, Item 1 the financial information included in the discussion that follows is, unless otherwise specified, limited to Argonaut Group for the periods prior to the Merger, and includes combined Company information subsequent to August 7, 2007, the Merger completion date.

Effective December 31, 2007, Argonaut Group and PXRE Corporation, two intermediate holding companies merged, resulting in PXRE Corporation becoming the surviving entity that was renamed Argo Group US. References in the following discussion to Argonaut Group pertain to the period prior to this merger.

On May 14, 2008, the Company completed its acquisition of Heritage, a specialist insurer based in London. Heritage is focused on underwriting worldwide property and non-U.S. liability risks. Heritage's worldwide property unit concentrates on underwriting short-tail risks with an emphasis on commercial property. Heritage's non-U.S. liability unit underwrites non-U.S. professional indemnity insurance and other liability classes. The results of operations for Heritage are included in the consolidated financial statements from May 31, 2008.

Forward Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk and the accompanying Consolidated Financial Statements (including the notes thereto) may contain "forward looking statements," which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that actual developments will be those anticipated by the Company. Actual results may differ materially as a result of significant risks and uncertainties, including non-receipt of the expected payments, changes in interest rates, effect of the performance of financial markets on investment income and fair values of investments, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the impact of competition and pricing environments, changes in the demand for the Company's products, the effect of general economic conditions, adverse state and federal legislation and regulations, government investigations into industry practices, developments relating to existing agreements, heightened competition, changes in pricing environments, volatility and disruption in national and international financial markets and changes in asset valuations. For a more detailed discussion of risks and uncertainties, see the Company's public filings made with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statements.

Results of Operations

The following is a comparison of selected financial data from the Company's
results of operations:



                                                      Three Months Ended            Nine Months Ended
                                                        September 30,                 September 30,
(in millions)                                         2008           2007           2008          2007
Gross written premiums                             $    477.7       $ 332.9      $  1,221.9      $ 896.5

Earned premiums                                    $    322.8       $ 220.7      $    803.4      $ 636.2
Net investment income                                    38.8          37.3           113.4         93.8
Fee income                                                8.2            -             10.2           -
Realized investment and other gains (losses),
net                                                     (18.4 )         0.7           (18.3 )        4.6

Total revenue                                      $    351.4       $ 258.7      $    908.7      $ 734.6

Income (loss) before income taxes and
extraordinary item                                       (6.4 )        12.0            64.5         79.8
Provision for income taxes                                2.4           5.1            13.4         26.8

Income (loss) before extraordinary item                  (8.8 )         6.9            51.1         53.0
Extraordinary item                                         -           67.3              -          67.3

Net income (loss)                                  $     (8.8 )     $  74.2      $     51.1      $ 120.3

Loss ratio                                               70.8 %        70.9 %          65.3 %       62.8 %
Expense ratio                                            35.4 %        38.1 %          35.8 %       38.1 %

Combined ratio                                          106.2 %       109.0 %         101.1 %      100.9 %

The increase in consolidated gross written premiums and earned premiums for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 was primarily attributable to the operations of Argo Re and Heritage, coupled with premium growth in the public entity products written in the Commercial Specialty segment. Earned premiums resulting from Heritage were $80.4 million for the three months ended September 30, 2008, and $111.7 million from the date of acquisition through September 30, 2008. Earned premiums resulting from Argo Re were $18.2 million and $36.9 million for the three and nine months ended September 30, 2008, respectively. Earned premiums within the Commercial Specialty segment increased to $92.6 million and $261.0 million for the three and nine months ended September 30, 2008, respectively, compared to $78.3 million and $220.3 million for the same periods in 2007. During the three and nine months ended September 30, 2008 competition, across virtually all products the Company offers, continued to increase with respect to pricing. For the nine months ended September 30, 2008, pricing continued to decline moderately. Earned premiums for the three and nine months ended September 30, 2008 were reduced by $3.4 million for net reinstatement premiums related to property catastrophe reinsurance contracts.

The increase in consolidated net investment income was primarily attributable to increased invested assets due to the recent acquisitions. Consolidated net invested assets increased to $3,770.5 million as of September 30, 2008, excluding invested assets of $239.1 million, which are for the benefit of other capital providers of Heritage. Invested assets as of September 30, 2007 were $3,656.0 million.

Consolidated fee income represents commissions and other fees earned by the Company for the non-risk bearing activities. Fee income is generated by the Commercial Specialty segment as a result of business placed with other insurance companies. In addition, the International Specialty segment generates fee income from managing third party capital for certain syndicates at Lloyd's. Consolidated fee income was $8.2 million and $10.2 million for the three and nine months ended September 30, 2008, respectively, including $3.7 million and $5.0 million related to Heritage.

Consolidated realized investment and other gains (losses), net, for the three months ended September 30, 2008 was ($18.4) million compared to $0.7 million for the same period ended 2007. Included in realized investment losses for the three months ended September 30, 2008 was ($20.1) million due to the recognition of other-than-temporary impairments compared to ($0.9) million for the same period ended 2007. The Company regularly evaluates its investment portfolio for indications of other-than-temporary impairments to its holdings. If individual securities are determined to have an other-than-

temporary impairment, the security is written down to its fair value. For the nine months ended September 30, 2008, consolidated realized investment and other gains (losses), net, was ($18.3) million compared to $4.6 million for the same period ended 2007. Included in realized investment gains were recognized losses due to the recognition of other-than-temporary-impairments of ($29.0) million and ($1.3) million for the nine months ended September 30, 2008 and 2007, respectively. Partially offsetting these realized losses for the nine months ended September 30, 2008 was a realized gain on the sale of PXRE Reinsurance Company of $2.3 million (which closed in the first quarter of 2008) and realized gains from the sale of securities totaling $8.4 million.

Consolidated losses and loss adjustment expenses were $228.4 million and $156.4 million for the three months ended September 30, 2008 and 2007, respectively. The consolidated loss ratios were 70.8% and 70.9% for the three months ended September 30, 2008 and 2007, respectively. Included in losses and loss adjustment expense for the current accident year were $56.5 million in losses resulting from hurricanes Gustav and Ike. Favorable development on prior accident years included $10.6 million for property lines and $4.8 million in casualty lines for the three months ended September 30, 2008. Unfavorable development on prior accident year reserves for the three months ended September 30, 2008 consisted of $9.1 million in reserve strengthening for the Company's asbestos and environmental lines. Partially offsetting this development was $4.5 million related to a reduction in an allowance for reinsurance balances due that was recognized as a reduction to ceded incurred but not reported losses. Included in losses and loss adjustment expenses for the three months ended September 30, 2007 was $27.1 million in unfavorable development on prior accident years' loss reserves, including $26.0 million in reserve strengthening for the asbestos and environmental claims. For the three months ended September 30, 2007, favorable development was $5.8 million, primarily in the property, liability and medical malpractice lines.

Consolidated losses and loss adjustment expenses were $524.7 million and $399.6 million for the nine months ended September 30, 2008 and 2007, respectively. The consolidated loss ratios were 65.3% and 62.8% for the nine months ended September 30, 2008 and 2007, respectively. Included in losses and loss adjustment expenses for the nine months ended September 30, 2008 was $41.2 million in favorable loss reserve development on prior accident years, primarily attributable to the property, general liability, other liability and automobile lines. Partially offsetting this favorable development was $14.6 million in unfavorable development, including $9.5 million reserve strengthening for the Company's asbestos and environmental liabilities, partially offset by the reduction in reinsurance balances due noted above. Included in losses and loss adjustment expenses for the nine months ended September 30, 2007 was $29.3 million in unfavorable development on prior accident years' loss reserves, including $26.0 million in reserve strengthening for the asbestos and environmental claims. In addition, for the nine months ended September 30, 2007, favorable development was $24.3 million, primarily in the property, liability and medical malpractice lines.

In determining appropriate reserve levels for the quarter, the Company maintained the same general processes and disciplines that were used to set reserves at prior reporting dates. No changes in key assumptions were made to estimate the reserves since the last reporting date; however the maturation of claims since last analysis provided a basis to assign greater credibility to emerged loss development patterns. Consistent with prior reserve valuations, actuarial estimates were refined to assign alternate weights to the different loss forecasting methodologies in order to respond to any emerging trends in the paid and reported loss data. These modifications to the analysis varied depending on whether the line of business was short-tailed or long-tailed and also varied by accident year.

When determining reserve levels, the Company recognizes that there are several factors that present challenges and uncertainties to the estimation of loss reserves. Examples of these uncertainties include growth over the last several years in both the Excess and Surplus Lines and Commercial Specialty segments, and changes to reinsurance structure. The Company's net retained losses vary by product and they have generally increased over time. To properly recognize these uncertainties, both internal and independent actuarial reviews relied, to a large extent on the paid and incurred Bornhuetter-Ferguson methodologies, which generally produced higher projections of ultimate losses than the other methods. Compared with other actuarial methodologies, the paid and incurred Bornhuetter-Ferguson methods assigned the smallest weight to actual reported loss experience, with the greatest weighting assigned to an expected or planned loss ratio. The expected or planned loss ratio has typically been determined using conservative

assumptions pertaining to prospective loss frequency and loss severity. In setting reserves at September 30, 2008, the Company continued to rely most heavily on the paid and incurred Bornhuetter-Ferguson methods; however certain additional weighting was assigned to other actuarial methods to recognize the most current trends emerging in paid and reported loss data.

For general liability business, the Company increased its written premium volume significantly from 2002 through 2006. This growth occurred in both the Excess and Surplus Lines and Commercial Specialty segments. The premium increases derived from both organic growth and acquisitions. In setting loss reserves, internal and external actuaries assumed that the new business may not perform as well as renewal business and that prior year loss development patterns may not be representative of future loss emergence. Thus, the actuarial methods that produced more conservative loss estimates were assigned the greatest weight. The Company's loss reserve estimates gradually blend in the results from other methodologies over time. For general liability estimates, more credibility is assigned to the Company's own loss experience approximately 60 to 72 months after the beginning of an accident year. Over the course of time, the Company has recognized that the new business growth from 2002 through 2006 exhibited similar underwriting and profitability characteristics as the Company's renewal book. Further review and analysis of the data in the third quarter of 2008 suggested that favorable loss experience on the new business growth continued to emerge in the third quarter of 2008. Thus the Company reduced its ultimate loss estimates for general liability lines of business for the 2003, 2004, 2005 and 2006 accident years.

Another factor that was considered in setting loss reserves at September 30, 2008 was the impact of the Company's reinsurance protection. The Company's excess of loss reinsurance coverage has varied by product. For most general liability products, the net per occurrence retention increased from $250,000 to $500,000 on September 1, 2002 and then to $1,000,000 on October 1, 2006. When loss reserves were determined in prior quarters, the Company expected a greater number of large claims in the $250,000 excess of $250,000 layer of coverage. In 2006 and again in 2007, after a review of reported large loss activity, the Company began to recognize that the increased retention in the $250,000 excess of $250,000 layer did not have as material an impact on net retained losses as had originally been contemplated. Furthermore, the decision to increase net retentions had a favorable effect on net loss ratios. The Company began to recognize this additional information in its estimate of December 31, 2006 loss reserves. In the third quarter of 2008, as part of the Company's internal actuarial review of reserves, the Company continued to observe lower than expected large loss activity in the $250,000 excess of $250,000 layer of coverage and further reduced its loss estimates for the 2003 through 2005 accident years.

For property business, the Company's loss reserve estimates also blend in the results from other methodologies over time. In contrast to general liability estimates, full credibility is assigned to the Company's own loss experience approximately 24 to 36 months after the beginning of an accident year, where loss reporting and claims closing patterns settle more quickly. The Company's own loss experience receives partial weighting in the estimates 12 to 24 months after the beginning of the accident year. As such, the Company began to recognize favorable loss experience for the 2005 and 2006 accident years in 2007. Likewise, during 2008, the Company began to recognize favorable loss experience deriving from the 2006, and 2007 accident years and this favorable loss experience continued to emerge in the third quarter of 2008.

Consolidated underwriting, acquisition and insurance expenses were $114.2 million and $287.8 million for the three and nine months ended September 30, 2008, respectively, compared to $84.1 million and $242.4 million for the same periods in 2007. The consolidated expense ratio declined to 35.4% for the three months ended September 30, 2008 from 38.1% for the same period in 2007. Included in underwriting, acquisition and insurance expenses for the three and nine months ended September 30, 2008 was $4.5 million of bad debt expense due to the write-off of a reinsurance recoverable balance. Included in consolidated underwriting, acquisition and insurance expenses for the three months ended September 30, 2007 was $8.1 million resulting from the operations of PXRE for the period from the closing date of the Merger for which there was $1.2 million of negative earned premiums due to reinsurance cessions. Consolidated expense ratios for the nine months ended September 2008 and 2007 were 35.8% and 38.1%, respectively. Included in underwriting, acquisition and insurance expenses for the nine months ended September 30, 2007 was $10.2 million of additional compensation expense resulting from the acceleration of the vesting of certain share-based payment arrangements.

Consolidated interest expense and other increased to $15.2 million and $31.7 million for the three and nine months ended September 30, 2008, respectively, from $6.2 million and $12.8 million for the same periods in 2007. Interest expense increased to $8.0 million and $22.2 million for the three and nine months ended September 30, 2008, respectively, compared to $6.6 million and $13.2 million for the same periods in 2007. The increase in interest expense was attributable to $167.1 million of junior subordinated debentures acquired in the merger with PXRE, as well as $68.5 million of other indebtedness acquired in the acquisition of Heritage. Foreign currency exchange losses totaled $3.3 million for the three and nine months ended September 30, 2008, compared to a foreign currency exchange gain of $0.4 for the same periods ended 2007. Also included in interest expense and other for the three and nine months ended September 30, 2008 was $3.7 million and $5.7 million, respectively, in expense related to the generation of fee income. Fee income is generated by the Commercial Specialty segment as a result of business placed with other insurance companies. In addition, the International Specialty segment generates fee income from managing third party capital for certain syndicates at Lloyd's.

The consolidated provision for income taxes was $2.4 million for the three months ended September 30, 2008, compared to $5.1 million for the same period in 2007. The consolidated income tax provision for the periods in 2008 represents the income tax expense associated with the Company's operations based on the tax laws of the jurisdictions in which they operate. Therefore, the consolidated provision for income taxes represents taxes on net income for the Company's United States and United Kingdom operations. The consolidated provision for income taxes for the nine months ended September 30, 2008 was $13.4 million compared to $26.8 million for the same period in 2007. The consolidated provision for income taxes for the nine months ended September 30, 2008 was reduced by $2.6 million for adjustments to the tax liability accounts related to the sale of PXRE Reinsurance Company and a $3.7 million reduction to the deferred tax asset valuation allowance. The remaining decrease in taxes for the nine months ended September 30, 2008 compared to the same period of 2007 was due to $15.3 million lower income before taxes.

Segment Results

The Company is primarily engaged in writing property and casualty insurance and reinsurance. Prior to the Merger, Argonaut Group classified its business into three ongoing reporting segments: Excess and Surplus Lines, Commercial Specialty (formerly known as Select Markets) and Run-off Lines. PXRE classified its business prior to the Merger into two reportable property and casualty segments:
Catastrophe & Risk Excess and Exited Lines.

Subsequent to the Merger, the Company evaluated its reporting segments and management determined that the Company would have three ongoing reporting segments: Excess and Surplus Lines and Commercial Specialty segments (which were previously included in Argonaut Group's ongoing reporting segments), and the Reinsurance segment (formerly known as International Specialty - see discussion below). Additionally, the Company has a Run-off Lines segment for products that it no longer writes. Amounts applicable to prior periods have been reclassified to conform to the presentation followed in 2008.

With the acquisition of Heritage in May 2008, management determined that the results of the operations of Heritage defined a new reporting segment. Management determined that the segment name "International Specialty" most accurately described the activities of this segment. The results of operations of Argo Re and other reinsurance programs are reported in the "Reinsurance" segment. Management believes this segment structure better reflects the current operations and future business plan of the Company. Amounts applicable to current and prior periods for Argo Re and the international reinsurance programs have been reclassified to the Reinsurance segment.

In evaluating the operating performance of its segments, the Company focuses on core underwriting and investing results before consideration of realized gains or losses from the sales of investments. Management excludes realized investment and gains and losses from segment results, as decisions regarding the sales of investments are made at the corporate level. Although this measure of profit
(loss) does not replace net income (loss) computed in accordance with GAAP as a measure of profitability, management utilizes this measure of profit (loss) to focus its reporting segments on generating operating income, which excludes realized gains and losses on sales of investments.

Excess and Surplus Lines. The following table summarizes the results of operations for the Excess and Surplus Lines segment for the three and nine months ended September 30, 2008 and 2007:

                                                         Three Months                  Nine Months
                                                     Ended September 30,           Ended September 30,
(in millions)                                         2008           2007           2008           2007
Gross written premiums                             $    176.5       $ 179.9      $    516.9       $ 546.3

Earned premiums                                    $    131.4       $ 138.8      $    392.5       $ 406.4
Losses and loss adjustment expenses                      84.4          82.2           242.9         231.7
Underwriting, acquisition and insurance expense          43.4          43.5           129.5         128.9

Underwriting income                                       3.6          13.1            20.1          45.8
Net investment income                                    15.7          13.9            46.5          40.1

Income before income taxes                         $     19.3       $  27.0      $     66.6       $  85.9

Loss ratio                                               64.2 %        59.2 %          61.9 %        57.0 %
Expense ratio                                            33.0 %        31.3 %          33.0 %        31.7 %

Combined ratio                                           97.2 %        90.5 %          94.9 %        88.7 %

The decline in earned premiums for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 was primarily attributable to a reduction in gross written premiums in 2008 compared to 2007. The declines in gross written premiums were primarily due to market conditions. The excess and surplus lines market place continues to see increased competition, from both other excess and surplus lines carriers as well as the standard markets, which has led to lower rates and business shifting to the standard markets. The Excess and Surplus Lines segment has seen rates decline moderately for the three and nine months ended September 30, 2008, respectively, as compared to the same periods in 2007. The number of policies written during the three and nine months ended September 30, 2008 were comparable to same periods of 2007. Average policy size for the three months ended September 30, 2008 was $5,841, which is comparable to average policy size of $5,897 for the same periods ended 2007. Average policy size for the nine months ended September 30, 2008 declined to $5,780 compared to $6,113 for the same periods ended 2007. Additionally, earned premiums for the three and nine months ended September 30, 2008 were reduced by $4.3 million of reinstatement premiums related to property catastrophe reinsurance contracts.

The loss ratios for the three months ended September 30, 2008 and 2007 were 64.2% and 59.2%, respectively. Included in losses and loss adjustment expenses for the three months ended September 30, 2008 was $12.6 million in losses resulting from hurricanes Gustav and Ike. Offsetting these losses was $12.5 million of favorable loss reserve development for prior accident years primarily driven by favorable reserve development of $7.4 million relating to property lines for the 2006 and 2007 accident years, and $4.4 million for casualty lines of business for the 2003 through 2005 accident years. Losses and loss adjustment expenses for the three months ended September 30, 2007 include $2.7 million in favorable development on prior accident years related to the liability lines.

Losses and loss adjustment expenses for the nine months ended September 30, 2008 . . .